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Advance Subscription Agreements and the Non-Priced Round

24/11/2016

At a glance

Funding for startups and growth companies is evolving. We have recently seen an increasing use of “advance subscription agreements” (or “ASAs”) for both early stage and Series A/B investments.

Convertible loans (as a type of debt instrument) have frequently been used as a form of bridging before a financing round.  ASAs are similar to convertible notes because they are both commonly referred to as “non-priced rounds” – that is to say that the price for the shares is determined by reference to a future event i.e. the next equity financing round, which is also referred to as a “priced round”.

Non-priced rounds are becoming increasingly popular because it delays a potentially lengthy and expensive discussion about the company’s valuation. This is often preferred by angel investors who are happy to wait until a larger player (e.g. a larger VC fund) has made a “priced” equity investment. The number of shares issued to the investor on a conversion can be based either on:

  • a percentage discount to the price per share set at the equity “priced” round; or
  • a pre-money valuation cap.

The pre-money valuation cap is the highest value at which the convertible note would convert in the equity raise, regardless of the actual price determined by the equity financing round. For example, if the company achieved a high valuation in the equity fundraising, the investor would potentially receive a lower number of shares than expected. The valuation cap provides protection to investors to guard against this.

The main difference between ASAs and convertible notes is that the ASA does not carry interest and is not repayable. If there has been no financing round or other conversion event, typically the amount paid under the ASA will convert into equity at an agreed longstop date and at an agreed price. ASAs are becoming increasingly popular in the UK because they may allow the investor to claim Seed Enterprise Investment Scheme (SEIS) or Enterprise Investment Scheme (EIS) relief on the investment.

One of the advantages of a convertible note is that the investment is a debt owing by the company and therefore remains payable. Under the ASA, the investor typically has no right to repayment of the funds and therefore the investment is either converted on a longstop date or via an insolvency related event. Although commonly unsecured, convertible notes will rank ahead of shareholders in an insolvency event.

One of the key attractions to ASAs is timing – there are usually far fewer documents to negotiate than in an equity round and therefore this will often appeal to an investee company in need of urgent capital.

If you are an investor or an investee company and would like more information about the content of this article, please get in touch.

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